Business spending key to second-half hopes

Commentary: Buyers of IT have to believe in strong 2012 finish

JohnShinal

SAN FRANCISCO (MarketWatch) — As May begins, investors who are considering rebalancing their portfolios by industry sector would do well to pay attention to the trajectory of U.S. technology spending.

To be buying tech stocks or funds right now, at the start of the historically weak May to November period, you have to believe in a strong second half for corporate-IT spending growth.

That’s because the tech sector has outperformed the market overall this year, even though sector-earnings growth has been weaker than average. For the year to date, the Nasdaq Composite Index
COMP, +1.42%
is up 15%, compared with a 10% rise in the S&P 500 Index
SPX, +1.09%
The Nasdaq also has outperformed the S&P 500 by about 5 percentage points since the market’s bottom in late November.

If the tech rally is to continue, U.S. business spending will need to carry the second half. The U.S. consumer-spending number for March, which showed just half the growth of February, provided more evidence of that.

Another pertinent data point came out last week, when Gartner Inc., one of the largest IT-research firms, cut its 2012 view for global IT-spending growth to 2.5%, from an earlier forecast of 3.7%.

Gartner pinned the diminished expectations on austerity programs in Europe, where governments and businesses are expected to spend less on hardware and software this year than originally forecast.

In fact, it said that the entire downward revision wasbecause ofo a stronger dollar compared with the euro. Global IT spending in constant U.S. dollars is now forecast to hit $3.7 trillion — a 5.2% risethat iss higher than Gartner’s previous forecast of 4.6%, in constant-dollar terms.

That echoes what I’ve been hearing from start-up chiefs and tech executives at established U.S. companies: that the turmoil in Europe is a double-edged sword. While European governments will be spending less than expected this year, European tech firms are having trouble getting access to the financing needed to win large deals.That iss benefiting their U.S. rivals.

Earnings growth vs. economic growth

With more than a third of the tech companies in the S&P 500 having reported first-quarter results, earnings so far are 3.5% higher than a year earlier, less than half the 7.3% growth of the index overall. Still, because the market looks into the future, tech stocks have outperformed so far in 2012.

Hopes for a second-half surge are driving bullish earnings expectations for the sector, according to the latest estimates from the equity-research analysts at Zacks.

The computer and technology companies among the largest U.S. corporations are expected to post net income growth of 13.4% for all of 2012, Zacks said last week.That iss higher than the 10% growth rate expected overall.

With first-half growth in tech earnings expected to be just more than 10%, U.S. tech firms will have to post strong second-half numbers to get to that level of full-year growth.

Tech stocks tend to do better in the latter stages of an economic recovery, in part because corporations must first recover from the last downturn before they start investing in the next recovery. These days, that investment is often in the form of hardware and software.

The U.S. GDP report released last week showed that the economy has now grown for 11 consecutive quarters, following the steep recession of late 2008 and early 2009.

Yet that same report showed first-quarter growth decelerated to 2.2% from 3% in the fourth quarter of last year. The Commerce Department said the slowdown was due largely to lower spending by governments and businesses. Read more about the drop in GDP.

Consumer spending was a strong point for the quarter, but as stated above, it also weakened from February to March.

All of this means there are reasons to be wary of bets that assume corporate-IT spending in the back half of the year will be strong enough to pick up the slack from any weakness among consumers. It could happen. But if it doesn’t, tech stocks will be retracing some of their 2012 gains.

So what to do? One answer is to pay attention to the components of reports that reflect IT spending by U.S. businesses, and what those numbers do to the Nasdaq. Then time your bets accordinglyThat is

That’s tough to do, and there is another alternative — onthat is’s so easy it has become a maxim among Wall Street money managers: Sell in May and go away.

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